Why is a bank guarantee needed?

In a sense the term “bank guarantee” is a bit of a misnomer because the truth is, although it is the bank and its reputation that is putting forward the Swift MT760 bank guarantee, they are doing little more than making the guarantee with funds that they have agreed to freeze in your account.

I high profile financial circles, trades and commodity sales can frequently reach into the millions of dollars. No supplier in his right mind would take an open order for the sale of goods or services in this magnitude, in this situation 2% ten days; net 30 on open terms do not wash. The individual or company that is selling wants a very strong guarantee that they will get payment per the contract that has been entered into.

Here is a brief explanation of how this works and why. It all starts between two entities, the one who wishes to sell something and the one who wishes to buy it. Neither of these entities knows one another; they have no trading history to go on. The seller is the one who takes the highest risk so he approaches his bank and asks if there is any way to determine if the buyer has the funds necessary to consummate the deal. If the bank is involved in Swift dealings, and some are not, the bank will send the bank of the buyer what is known as a Swift 799, typically a “pre-advice” document.

The bank has certain details of the transaction; one important detail of course is the transaction amount. The seller’s bank then gets notification that the buyer has sufficient funds available. This phase can happen days or even weeks before the MT760 bank guarantee is opened.

The MT 799 is not nor can it be used as collateral. Let’s delve father into this and see what happens next.

Once the contract has been agreed and signed, the Swift MT760 is issued, at this time the contract amount is frozen in the account of the buyer and the bank guarantees that it will be paid over to the seller upon completion of the contract.

There are banks that hesitate to offer a Swift MT760 bank guarantee and should this happen the parties can either use a letter of credit, a wire transfer or go to a bank or a capital fund and arrange the guarantee through another bank.